is reporting Subprime lenders yank most popular loan type.

Lenders have abruptly stopped offering the most popular type of subprime mortgage. Credit-challenged borrowers suddenly have fewer options. “Many borrowers are not going to be able to refinance,” says Deborah Goldstein, executive vice president of the Center for Responsible Lending.

Over the past few years, the most common type of subprime loan has been an adjustable-rate mortgage known as the 2/28 ARM. Since mid-July, five of the six biggest subprime mortgage lenders stopped offering 2/28 ARMs. Suddenly, there’s a shortage of the type of mortgage preferred by about 60 percent of subprime borrowers.

“We think it’s a good thing for consumers,” Goldstein says, because too many 2/28 ARMs were underwritten without regard to whether borrowers could afford to repay them. “So we think it’s positive that lenders are going to stop offering that product. It doesn’t mean they’ll stop offering subprime loans.”

What’s a refi customer to do?
Mortgage brokers and loan officers say borrowers who need to refinance their subprime mortgages still have options — just not as many. Some lenders might still offer 2/28 and 3/27 ARMs, although the rates might be high — possibly into the double digits.

[Mish comment: I will have more on spreads, who is affected and how, as well as why Cramer is wrong about interest rate cuts in my next post later today].

“It’s old-school again,” one mortgage banker sums up.

What about homeowners who face an impending rate reset that will send their payments to unaffordable levels, but can’t qualify for a refinanced loan — either because of insufficient payment history and income, or because they owe more than the house is worth?

“Some families are going to have to make ugly decisions,” a banker says, by cutting back on spending or, in the worst case, losing the home in foreclosure.

For a look at how ugly things can get, let’s look at some numbers.

Estimated Purchase Dollar Originations 2002

Estimated Purchase Dollar Originations 2006

The above charts courtesy of Credit Suisse
I do not have 2004-2005 originations but I think you get the idea.

Who is guaranteeing a portion of those loans? One such company is MGIC Investment Corp. (MTG).

MGIC Investment Corporation, through its subsidiary, provides private mortgage insurance to the home mortgage lending industry in the United States. The private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes.

Its primary insurance provides mortgage default protection on individual loans and covers unpaid loan principal, delinquent interest, and various expenses associated with the default and subsequent foreclosure, and generally apply to owner occupied, first mortgage loans on one-to-four family homes, including condominiums.

(click on charts for a crisper image)

It sure seems the market is losing confidence in those guarantees. See Cold Feet and Sea Bass for more on this story.

So here we are, right on the verge of massive numbers of loans that will reset and the products current applicants are in, are simply no longer available.

Some families are going to have to make ugly decisions, by cutting back on spending or, in the worst case, losing the home in foreclosure.

Ugly is right.

Mike Shedlock / Mish/